Huawei ‘Strikes Back’: Global 5G Patent Battle Might Be Getting Started

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The Chinese telecommunications giant is showing aggressive on intellectual property litigation to hedge the risk of U.S. sanctions.

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  • Huawei is planning to collect patent royalties for 5G devices.
  • Compared with its major competitors, Huawei's proposed royalty standard is relatively low.
  • The new plan may help the company increase revenue while promoting its self-developed operating system HarmonyOS.
  • Possible IP-related conflicts and global technology system fragmentation should draw the company's attention.

On March 16, Huawei released its Whitepaper on Innovation and Intellectual Property 2020 at a forum held in the company's Shenzhen headquarters. At the same event, Huawei's Head of Intellectual Property Rights Department, Jason Ding, announced that Huawei is currently mulling over patent royalties for every 5G mobile phone with a per-unit royalty cap of up to USD 2.5. Meanwhile, per Mr. Ding, the rates for other 5G-enabled devices may vary.

Compared with those of its peers in the field, Huawei's prospective royalty rates are rather affordable. In early 2018, Qualcomm announced its 5G royalty fee standard equivalent to 2.275% to 5% per device. Ericsson's standard is up to USD 5 per unit, and Nokia's standard is up to EUR 3. Here below, we discuss the reasons and possible impacts of Huawei's new move.


The Impact Of Trade Restrictions

In 2020, Huawei achieved revenue of CNY 891.4 billion, up 3.8% year on year. Its operating profit, however, decreased by 6.9% year-on-year to CNY 72.5 billion, and operating cash flow plummeted by 61.5%, compared with 2019. It is well known that Huawei's most critical problem last year was the latest Sino-American standoff. While this issue remains acute, the company’s managed to keep its total revenue growth, with 54.2% of it contributed by the consumer business.

Huawei 2

Besides, Huawei's operations and market share have also been significantly impacted. In the fourth quarter of 2020, Huawei's smartphone deliveries fell by 42.4% year on year to 32.3 million units, with a global market share of only 8.4%, ranking fifth. In 2020, the global deliveries of Huawei 5G smartphones decreased by 21.5% year over year, with a market share of only 14.6%, ranking third worldwide. By contrast, Xiaomi and Apple's delivery volumes have increased.

According to data from CINNO Research, in January 2021, China's market delivered 30.7 million smartphones, with a year-on-year growth of 35%, while Huawei took merely 15.2%, falling to fourth place. Considering that its domestic market share used to be at 46% in its peak period (2019), Huawei's consumer business is facing an unprecedented crisis now.

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Some may believe that the brand-new patent royalties plan is a measure to alleviate this situation. We analyze some possible rationales and effects in the following chapter.

5G Royalties: Why And What For

The most straightforward point is that patent royalties can increase Huawei's revenue, which was damaged by geopolitical tensions. Nevertheless, Liuping Song, Huawei's CLO, said that intellectual property will not become Huawei's main source of revenue, which instead will remain products and services. According to the company's estimates, its royalty revenue will only be about CNY 8 billion (USD 1.2 billion) from 2019 to 2021.

Moreover, royalty-based companies do not always have positive gains in their business operations. From a standpoint of market research, we believe that Huawei has analyzed the profits of the companies relying on royalties, such as Qualcomm, and recognized the risks. As a comparison, Qualcomm's patent licensing business accounts for more than 60% of the company's total profits. Most patents held by Qualcomm are 2G-related, 90% of which are CDMA-related. After that, since the 3G era all the way through the first years of the 5G rollout, the relative number of registered patents of Qualcomm has been decreasing. For example, in the 3G era, Qualcomm owned 27% of the core patents. In the 4G era, it had only 16%, while in the 5G era, it is currently holding only 8% of the total.  Over time, the American chipmaker paying a great deal of attention to patent royalties has seen one of its critical revenue directions shrinking.

Secondly, royalties may help Huawei win greater representation globally, from both a quantity and a quality perspective. In terms of quantity, according to Iplytics, Huawei ranked first in the field in 2020 with 3,147 patents, surpassing the second-place player Samsung (2,795). Huawei is also the company with the largest number of authorized patents in China. Beyond the absolute numbers, the F-OFDM developed by Huawei has become a globally unified 5G hybrid new waveform technical standard, and the polar code proposed by Huawei has also become the coding scheme of the 5G control channel for both the base station equipment and optical communication equipment. Moreover, Huawei is the international standard developer of IPv6. It provides more than 70% of the network equipment for the world's largest IPv6 network, the CNGI, which has been running steadily for over six years now.

In 2020, Huawei employed 105,000 researchers, accounting for 53.4% of the company's total number of workers. Huawei invests about 15% of its revenue into research every year, with a cumulative amount of capital spent on R&D of over USD 100 billion as of the end of 2020. At present, it has signed more than 100 patent cross-licensing agreements with major ICT companies globally. Collecting royalties can be regarded as a return for Huawei's continuous investment in the 5G field. At the same time, Huawei also expresses an attitude to the US-led alliance, casting off its 'victim' image in the past two years.

Thirdly, as a dominant player in the 5G area, by using royalties, it could recapture its market share. As mentioned above, in China's domestic market, Huawei's market share dropped by 40% to 15.2% in January 2021, falling to fourth place. According to a source who is familiar with the market, the burden of domestic mobile phone manufacturers is already heavy. In the past, under pressure from several patent monopolies, such as Qualcomm, the average profit margin of domestic mobile phone manufacturers was very low (less than 5%). In recent years, mobile phone manufacturers have had little flexibility and a lack of cooperation opportunities with Huawei. Thus, Huawei has not been able to reach royalty agreements with these manufacturers.

However, an alternative solution is for Huawei to incorporate overseas smartphone manufacturers, such as Apple and Samsung. Subsequently, it could gradually expand its cooperation with domestic mobile phone manufacturers as a feasible strategy. In addition, the scope of the 5G patent license is not limited to smartphones and may also extend to IoT and EV fields in the future while gaining a larger market share.

The fourth aspect is for Huawei to collect royalties in line with the Chinese government's policies. According to the Chinese Fourteenth Five-year Plan (link in Chinese), Chinese leaders plan to sharpen the use of antitrust, intellectual property (IP), and standards tools to advance industrial policies. Before this plan, it was controversial to address the intellectual property problem of China because excessive protection of intellectual property rights will suppress the enthusiasm of innovative companies. However, along with the development of technology and society, as well as the fact that the Sino-American trade relationship has transformed into a new stage, the enthusiasm of innovative companies has been activated. Protecting intellectual property rights has become more and more necessary, which will force domestic companies to innovate. Huawei's decision of collecting royalties is also adapted to the trend at this time.

Finally, collecting patent fees can also help Huawei market the HarmonyOS system. Huawei designed the HarmonyOS system as a family of operating systems for smart devices such as smart TVs. This system has also been used as a mobile operating system. Huawei may promote it by implementing a royalty reduction policy for manufacturers using the system. Notably, the premise of this benefit is that the preferential treatment will not constitute any legal and ethical problem, and the system has as high a quality as other competitive systems.

Potential Risk

In addition to the benefits, Huawei may also face several new risks. Firstly, royalty charges might involve Huawei in lawsuits. For example, the royalty-based company, Qualcomm, has repeatedly been accused of abusing its market position and forcing mobile phone manufacturers to pay for unnecessary patents. In February 2020, Huawei sued Wilson, the largest local telephone operator in the US, regarding patent practices, with an inconclusive ending. This lawsuit is just the tip of the iceberg that Huawei is struggling to address in terms of patent fees. More potential risks might come along with this new plan.

Another risk factor for charging royalties is the possible dual 5G system. Huawei has been trying to avoid splitting global technology into two systems in the long-term evolution. As long as the world is a unified technology system, Huawei can continuously and stably obtain benefits from it. For instance, Huawei can also obtain income from the US market through intellectual property income, including the US market and the markets that Huawei can't enter now. Once two technology systems emerge in the future, there will be no profit potential from the non-Chinese technology system market. Qualcomm in the 3G era is an example.

This article was originally posted by Zhenduo Wang, analyst at EqualOcean, an information service provider and investment research company focusing on China."